Measures to open up audit market have so far failed

Measures introduced to open up the market for big public company audits to
firms outside the Big Four have shown no evidence of success, according to a
report from the Financial Reporting Council (FRC).

The FRC, now under the leadership of Stephen Haddrill, has announced it will
now re-examine the issue before the end of the year to see what others steps
might be taken.

“To date there is limited evidence that the recommendations have had a
significant impact on market concentration and the risks arising from that
concentration. Over the next six months the FRC will develop proposals on what
further action in this area is appropriate, and if so what form that action
might take,” the report said.

In October 2007 15 recommendations were unveiled which aimed at improving
efficiency in the audit market and improving auditor choice for big public
companies.

In particular one of the recommendations targeted the problem of companies
being restricted in their choice of auditor to the Big Four through contractual
obligations, mainly to banks.

The FRC wanted companies to report on the issue publicly but the latest
review reveals that companies have responded poorly to the request.

Of 200 companies sampled just 28 reported on contractual restrictions and all
of them said they were under no obligation.

The rest of the companies were silent on the issue and the FRC said: “It is
unclear how many of those which were silent on the issue are subject to some
form of restriction from lenders or others.”

The report added that the watchdog “continues to receive anecdotal reports of
contractual restrictions, but without greater disclosure in the area by
companies it is difficult to assess whether the practice remains widespread.”

In a further disappointment for the regulators just seven companies reported
on what would happen if they lost their auditor and of those five merely said
that the issue had been considered “without any indication of the outcome of
that consideration”.

Barely a quarter of the companies reported on the “tenure’ of their incumbent
auditor and “many of those that did failed to state exactly how long the
relationship had lasted, noting that the firm concerned had been auditor for
‘many years’ or ‘a number of years’.”

Just two companies in the 200 tested reported on having a formal policy of
putting their audits out to tender.

The FRC also concluded that that “the biggest challenge to increasing choice
in the audit market remains the question of perception.”

After speaking to a number of audit committee chairman the FRC found that a
“majority” were reluctant to select a non Big Four for “perceived reputational
reasons”.

After testing proposal documents from the big audit firms the FRC concluded
that “the largest firms focused heavily on size in their proposal documents. The
firm’s size, together with its brand, was marketed as a proxy for quality.”

The FRC said this was surprising because the companies involved had straight
forward audit requirements.